Economists Worried by Backlog in New Homes

Despite relatively healthy new home sales in March, economists are beginning to fret that new home inventories are climbing to ominous levels.

In March, the nation had 379,000 unsold new homes, a nearly seven-month supply at current sale rates. The Northeast had a 13.2-month supply of unsold new homes.

Meanwhile, builders show no sign of slowing down. A recent survey by the National Association of Home Builders found that builders remain optimistic about sales in the coming months, even though fixed-rate mortgages became more expensive in February and March. It based its assessments, in part, on buyer traffic and actual sales.

But if 30-year fixed mortgage rates climb one more percentage point, to 9%, the high stockpiles of unsold homes are "a growing risk factor" for the economy, according to David Seiders, chief economist of the home builders trade group. Builders would be forced to slash production until the inventories slim down, and the economy could spin into a recession, Mr. Seiders said.

The last time new home inventories were at comparable levels was in late 1989, and at that time, they signaled the ensuing recession, Mr. Seiders32 said. Last week's report of unexpectedly strong economic growth in the first quarter intensified his concern, he said, because it augurs higher interest rates.

Other economists agree.

"Inventory levels are really the only dark spot in the current housing market," said Mark Zandi, chief economist at Regional Financial Associates.

Builders are overbuilding in the Northeast and in such strong growth regions as Salt Lake City, Denver, Phoenix, and Albuquerque, Mr. Zandi said.

The survey suggests that despite their optimism, builders are aware of a tightening market. It found that builders were trying to boost sales through such incentives as financing buyer closing costs, paying fees for discounted mortgages, and providing extra features without charge. But giveaways cut profits, Mr. Seiders pointed out.

He said that if rates were to rise, the effect on home sales - and thus new home building - would be cushioned by a consumer shift to adjustable- rate mortgages. Still, the shift would not be enough to make up for sales lost due to higher rates, he said.

Why is home building so prone to booms and busts?

"If the money is available, home builders tend to want to build without sales contracts in hand," Mr. Seiders said. "They are an awfully optimistic crowd."

Also, he said, the building industry is still made up of tens of thousands of small builders, making it hard for individual builders to gauge housing inventories in their own markets.

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